What Is an Amortization Schedule?
An amortization schedule is a comprehensive table that details each periodic payment on a loan (typically a mortgage or auto loan) over its entire term. It breaks down each payment into its principal and interest components, showing you exactly how your loan balance decreases over time until it reaches zero. Understanding this schedule is crucial for any borrower as it provides a clear picture of the loan's long-term cost.
How the Amortization Calculator Works
Our Amortization Calculator uses a standard financial formula to determine your monthly payment and create a detailed amortization schedule. Here’s a breakdown of the process and the formulas involved.
The Monthly Payment Formula
The calculator first determines your fixed monthly payment (P) using the following formula:
P = L[r(1+r)^n] / [(1+r)^n - 1]- L = Loan Amount (the total amount of money borrowed).
- r = Monthly Interest Rate (your annual interest rate divided by 12).
- n = Number of Payments (the loan term in years multiplied by 12).
Building the Schedule, Payment by Payment
Once the monthly payment is calculated, the schedule is built iteratively:
- Interest Portion: For each month, the interest due is calculated by multiplying the current loan balance by the monthly interest rate (r).
Interest = Current Balance × r - Principal Portion: The portion of your payment that goes towards reducing the loan balance is what's left after subtracting the interest.
Principal = Monthly Payment - Interest - New Balance: The new loan balance is calculated by subtracting the principal portion from the current balance.
New Balance = Current Balance - Principal
This process is repeated for every month of the loan term until the balance reaches zero.
Practical Example
Let's say you take out a $200,000 mortgage for 30 years at a 5% annual interest rate.
- Loan Amount (L): $200,000
- Annual Interest Rate: 5% (so, r = 0.05 / 12 = 0.004167)
- Loan Term: 30 years (so, n = 30 * 12 = 360 months)
Using the formula, the monthly payment is calculated to be approximately $1,073.64.
For the first payment:
- Interest: $200,000 × 0.004167 = $833.33
- Principal: $1,073.64 - $833.33 = $240.31
- New Balance: $200,000 - $240.31 = $199,759.69
Notice how in the beginning, a large portion of your payment goes to interest. As you continue to make payments, the principal portion grows, and the interest portion shrinks, accelerating your equity building.